Real Estate investing was a mixed bag in 2020. While single-family home demand was up big, 2020 was not kind to commercial real estate investing. But with a COVID vaccine rolling out across the country, an economic recovery may uncover some rock-bottom prices in commercial real estate and a big buying opportunity for savvy, risk-tolerant, value investors.
The commercial real estate landscape will look vastly different once it recovers. A premium will be put on health and safety measures for those returning to offices and retail. And while the demand for office space is not expected to return to normal levels until 2022, there certainly will be property types that will weather the 2020 storm and see a tremendous growth in value.
Below, we take a look at which CRE sectors are the most appealing for a value investment, which ones to stay away from and two great ways you can invest in commercial real estate in 2021.
Almost the entire CRE sector was drastically impacted in 2021. However, not all the impact was negative. Industrial real estate, health care, data centers, cell towers and distribution centers we all positively impacted while offices, hotels and retail were very negatively impacted by the COVID pandemic and quarantine.
According to Deloitte’s 2021 Commercial Real Estate Outlook, overall deal volume fell 36% YoY and prices are showing early signs of stress across the negatively impacted property types. U.S. retail and office price indices declined 4.1% and .5% YoY. Subsequently, troubled loans are rising with banks fearing delinquencies.
The SIOR Commercial Real Estate index reflects these impacts, particularly with office property types which continue to decline even as industrial property types show signs of recovery in Q3 of 2020.
As for the state of commercial real estate investing, investors should continue to stay away from office and retail property types. There is still so much uncertainty regarding this sector of CRE.
Companies are quickly digitizing their operations and the overall workforce is very much in favor of having work from home capabilities. If companies can realize normal operations without the expensive overhead of an office space, this sector will continue to see declines in value and an even longer road to recovery.
However, there is one CRE sector that could provide incredible value and see some tremendous growth in 2021.
Take a look at the CRE sectors performance in 2020:
Lodging and resort REITs experienced a 173% decline in funds from operations. Out of the top 20 hospitality REIT’s, only one saw positive performance and that was MGP (MGM Growth Properties) which grew 8%. Among all lodging and resort REITs, the average YTD return was -27%.
So, now the price of these REITs is at all-time lows. This gives us one factor for a value investing opportunity. The other factor is that consumers are boiling over with pent up demand for travel and vacation.
A new Hilton survey found that 94% of respondents who travel plan to do so once the quarantine restrictions are lifted. Two-thirds plan to make travel a priority and plan to take a “bucket list trip”.
Rock bottom prices and a feverish pent-up demand for travel make hospitality and lodging REITs the commercial real estate investing opportunity of a lifetime.
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Homing in on the hospitality sector, there are two great CRE investments that value investors should take a close look at. There are two REITs in this space that are particularly attractive at rock bottom prices.
MGP (MGM Growth Properties):
Las Vegas and gaming resorts around the country are poised to see a huge influx of travelers once travel restrictions are lifted.
MGP is one of the leading tripe net REITs engaged in the acquisition, ownership, and leasing of large-scale destination entertainment leisure resorts. The fact that they grew 8% in a sector that saw tremendous deterioration shows its strength and massive upside potential. This REIT also provides a quarterly dividend which has grown 36.4% since its IPO. That is an excellent dividend growth rate and further shows the strength of this REIT.
APLE (Apple Hospitality REIT):
Apple owns one of the largest and most diverse portfolio of upscale, rooms-focused hotels in the United States. The portfolio consists of more than 230 hotels in 34 states. The company’s portfolio consists of 104 Marriott branded hotels, 125 Hilton branded hotels and three Hyatt branded hotels.
Apple’s strong, flexible balance sheet shows a 41% net total debt to total capitalization ratio. And while they took a hit on EBITDA on the first quarter, they quickly recovered in May and showed positive adjusted EBTIDA for the rest of the year.
Justin Knight, CEO of Apple Hospitality REIT, pointed out that hospitality stocks are trading at significant discounts and “it’s an opportunity to buy in at a value price and take advantage of an improvement in the business as travel returns.
While CRE took a beating in 2020, the tide is shifting quickly. Before you know it, life will feel normal again and people put a greater value on creating new memories and experiences. As an investor, rock bottom prices and pent up consumer sentiment create one hell of a value play in the hospitality sector in CRE.